Executive comment: VMI requires paradigm shifts

Recently a survey of supply chain constituents was performed pertaining to the subject of Vendor Managed Inventory (VMI). The survey conducted by the Electronics Supply Chain Association (ESCA) and ChainLink Research Inc. found that 62% of OEMs and EMS providers surveyed experienced a reduction in cost by utilizing VMI, compared with 11% of suppliers.

The contrast between the two, however, should yield a yellow flag. VMI is one of our industry's more difficult paradigm shifts with a definition as varied as the methods used to implement the process. For the sake of this article, VMI is defined as inventory managed by the vendor (supplier) both in transit and at the customer's site.

VMI is a tool used to reduce costs and cycle times by coordinating the planning, sourcing and delivering supply chain activities more efficiently. As a business model it enables users to remove non-valuable steps in the process that take up unnecessary time.

VMI can eliminate many of the time consuming processes during the material requirements planning (MRP) stage, the planning process at OEMs and EMS providers used to determine the material needed for the job. Under the traditional procurement process, planned material orders, purchase requisitions, request for quotes and purchases can take an excessive amount of cycle time. In many instances this administrative cycle time can take longer than the typical 7 days between MRP planning software runs at OEMs and EMS providers. Under VMI, the combined processes of customer and supplier can potentially remove between 14 and 21 days from the supply chain cycle time.

In theory, the reduction in cycle time by electronically communicating information should yield more efficient processes and allow all participating supply chain partners to lower costs pertaining to acquiring and holding inventory. So why did the study yield better results for customers compared with suppliers?

Although the concept of VMI is well understood, paradigm shifts in the system need to occur. The shifts include:

-- Strategy and culture

-- Methods and practices

-- Policies and procedures

-- Tools

-- Metrics and quality improvement

Companies are continually implementing VMI as an additive layer or "bolt on" to the historical purchase order/sales order fulfillment system. For example, a legacy practice causing much consternation is a process of managing the customer inventory forecast via the supplier sales order system. Companies that have transitioned to new processes of using advanced planning tools instead of sales order backlog avoid confusion between both inventories on order and already delivered.

It was encouraging to see that the ESCA is taking steps to sponsor dialogue and study to support the betterment of our industry's service and logistics approaches. VMI has shown a beginning promise that needs to become fully embraced and matured. Unfortunately at the moment it feels more like taking cod liver oil for an ailment. However, keep in mind the taste of cod liver oil can make you feel sick, but after being administered it does help with the cure.

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Dave Bothwell is a supply chain service and logistics consultant. He can be reached at dave.bothwell@supplychainhelp.com.